Financial Wisdom: Vacation Home as an Income Property

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Do you and your family have a favorite vacation spot? Have you considered purchasing a single family home or condo in the area but are concerned about the added expenses? If so, consider a vacation home that doubles as an investment property. Whether the property is within the United States or abroad, a vacation home when purchased under the right conditions, can pay for itself and provide for years of enjoyment and financial return.

If you are considering retiring abroad, purchasing your retirement home now and using it as a vacation spot for part of the year and as a rental property for part of the year, can help to ensure an easy transition to retirement life when the time comes. In addition, if you rent the property out you can more quickly pay off the mortgage on the property, putting you in good financial shape for retirement.

The first step is to select a place that you really love and that you will love to vacation with your family and friends. It is important to make sure that the rental market is strong, taking into consideration high and low seasons and the demand for vacation homes. If the market is flooded with vacation properties available for rent, you may want to select another location or capitalize by making your property the best, most desirable on the market.

The second step in selecting a vacation home is to shop rental properties in the area you are considering. It is vital that you see in person what is popular, what amenities are highly sought after by renters and to identify the best possible locations to optimize your opportunity for the return on your investment. Pay particular attention to the quality of furnishings, the d├ęcor, the outdoor space and the number of bedrooms that are in demand.

Arguably, the location of your vacation property is more important than your primary residence. As an investment, location is everything. For example, in a beach community, a beachfront home will rent for more than a home a couple of blocks away. The same holds true in skiing communities; a ski-in/ski out property will rent for higher rates and be in greater demand than homes you have to hike or drive to.

Because you are purchasing a home in hopes that it pays for itself and even brings in a bit of extra money, you need to do the math to ensure that you are purchasing a home that will cash flow properly. For example, if the high season in the community is 16 weeks per year, and you are purchasing a $400,000 property, you can count on operating expenses in the $3,500 to $5,000 range depending on taxes, insurance and the amount of money for the down payment.

This means that you will need to rent the home at a minimum of $3,000 per week, during the 16 weeks to break even. If the market cannot bear that rental rate, then you should consider a different area or different property. Remember, expenses on a vacation home are different than your primary residence. Mortgage interest rates will be higher than for a primary residence, insurance and taxes are typically higher in resort areas, and the property will need to be managed, marketed and maintained to the highest standards to keep renters coming back.

Prior to purchasing a vacation home, check with your personal accountant to consider any impact on your personal taxes. There are some guidelines, depending on your income. This includes the number of nights you must stay in the property each year and whether you are actively managing the property. A vacation home can be a great answer if you are looking for a way to have a getaway spot or your future retirement home, paid for by renters.

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